Chapter (7) Master Budget : Overall Plan. Budget. Is a tool that helps managers both plan and control operations. In this chapter we will look at the uses and benefits of budgets and consider the construction of the master budget.
Is a tool that helps managers both plan and control operations.
In this chapter we will look at the uses and benefits of budgets and consider the construction of the master budget.
A plan that sets the overall goals and objectives of the organization.
Some business analysts do not call a strategic plan a budget because it covers no specific period and does not produce forecasted financial statements.
Long-range planning produces forecasted financial statements for 5- or 10-year periods. Long-range planning are coordinated with capital budgets.
A budget that details the planned expenditures for facilities, equipment, new products, and other long - term investments .
Thus, the master budget is a periodic business plan that includes a coordinated set of detailed operating schedules and financial statements. It includes forecasts of sales, expenses, cash receipts and disbursements, and balance sheet. Management might prepare monthly budgets for the year or perhaps monthly budgets for only the first quarter and quarterly budgets for the remaining three quarters.
A budget that summarizes the planned activities of all subunits of an organization – sales, production, distribution and finance.
Continuous Budget (or Rolling Budgets)
Continuous budgets compel managers to think specifically about the forth– coming 12 months and thus maintain a stable planning horizon.
The two major parts of a master budget are the operating budget and the financial budget.
Operating budget (profit plan)
A major part of a master budget that focuses on the income statement and its supporting schedules.
The part of a master budget that focuses on the effects that the operating budgets and other plans (such as capital budgets) will have on cash.
The usual master budget for a non – manufacturing company has the following components
A. operating budget
Exhibit 7-1 presents a condensed diagram of the relationships among the various parts of a master budget for a non - manufacturing company.
In addition to these categories manufacturing, companies prepare ending inventory budgets, production budget, and additional budgets for every resource activity (such as labor, material, and factory over heads)
Cost- of- Goods - Sold Budget
Operating Expenses Budget
Formalization of planning
Budgeting forces managers to think ahead to anticipate and prepare for changing conditions. The budgeting process makes planning an explicit management responsibility.
To prepare a budget, a manager should set goals and objectives, and establish policies to aid their achievement. Without goals and objectives , company operations lack direction; problem are not foreseen; and results are difficult to interpret afterward.
Budgeted goals and performance are generally a better basis for judging actual results than is past performance. The major draw back of using historical results for judging current performance is that inefficiencies may be concealed in the past performance.
Communication and Coordination
A good budget process communicates both from the top down and from the bottom up. Top management makes clear the goals and objectives of the organization in its budgetary directives to middle and lower-level managers, and to all employee. Employees and lower-level managers then inform higher - level managers how they plan to achieve the goals and objectives.